Chinese Consumers Go Mobile

David Yin examines the rise of mobile commerce in China and its potential impact on the composition of the nation's economy.

"In the US, e-commerce is just online shopping. In China, e-commerce is a lifestyle," said Jack Ma, founder of Alibaba, which went public on Nasdaq In September 2014 and raised $25 billion to become the largest initial public offering in history. Alibaba's rise symbolizes the breaknecek growth of China's Internet and e-commerce sectors. By 2016, China will have 730 million Internet users and 380 million online shoppers, up from 460 million and 145 million in 2010.

Due to major state investment in telecommunication infrastructure and a relatively underdeveloped physical retail sector, China has witnessed a boom in online retail, which offers better variety, lower prices, and greater convenience. By 2015, e-commerce is expected to hit 7.4% of total retail value in China and cover almost half of the urban population, thereby becoming the largest e-commerce market in the world.

Within e-commerce, mobile commerce (or m-commerce) is emerging to become a significant building block in China's economy. Smartphones, which are becoming cheaper and better, account for 80% of new phone sales in China today, contributing to its position as the world's largest smartphone market. Chinese consumers are also drawn to the convenience of mobile shopping, which allows them to shop anytime and anywhere, especially during commuting. 69% of smartphone users in China have used their devices to make a purchase, compared to only 46% in the US. In addition, the three national mobile operators--China Mobile, China Telecom, and China Unicom--have invested heavily in upgrading their infrastructure. In July 2014, they jointly announced plans to build a national 4G network capable of providing fast mobile broadband to a billion users.

Mobile shopping and payments come hand in hand. The rising popularity of Chinese mobile payment systems has facilitated m-commerce. Since June 2010, the People's Bank of China has issued over 200 licenses to non-financial institutions to provide third-party payment services and declared a national mobile payment standard. These two developments have led to explosive growth in the Chinese mobile payments market, which reached 1.43 trillion yuan ($228 billion) in Q3 2014, a five-fold jump from a year earlier.

Driven by high adoption rates of mobile devices, increased mobile network connectivity, and a boom in mobile payments, China's m-commerce sector jumped from 12 billion yuan ($1.9 billion) in 2011 to 828 billion yuan ($132 billion) in 2014, and comprised almost one-fifth of the overall e-commerce market. According to the consulting firm iResearch, m-commerce is expected to hit 2.5 trillion yuan ($400 billion) and constitute over half of the online retail market by 2016. In China, mobile will soon become the most important platform through which people purchase goods and services.

A catalyst for rebalancing

In China's 12th Five-Year Plan, the National Development and Reform Commission laid out various plans to restructure the economy, such as boosting domestic consumption and the service sector, raising wages and reducing inequality, and developing strategic emerging industries.

According to Stephen Roach, the former Chairman of Morgan Stanley Asia, the rise of new technologies such as m-commerce "can really accelerate China's transition" from an export- and investment-driven economy to one driven by domestic consumption, and from the labor-saving secondary sector (mostly manufacturing and construction) to the labor-intensive tertiary sector (mostly value-added services).

Given the underdeveloped and inefficient physical retail sector in China, e-commerce and m-commerce will play a crucial role in unlocking the spending power of Chinese consumers. This is especially true in smaller cities, where mobile devices are the primary means of going online and product variety for physical retail is more limited. A McKinsey study has found that despite having lower average incomes, consumers in Tier 4 cities expended as much on e-commerce as those in Tiers 2 and 3 cities since they spent a higher proportion of their disposable income on online shopping.

E-commerce and m-commerce in China increase spending as only 61% of overall online spending comes from replacing existing offline purchases, meaning the remaining comes from incremental consumption. By 2020, online shopping is estimated to increase private consumption by almost 7%, up from 2% in 2011.

At the 12th National People's Congress in March 2015, Chinese Premier Li Keqiang laid out the country's "Internet Plus" strategy, which aims to promote technology industries as the country's next engine of growth. Expanding China's m-commerce sector will boost employment, income, and the service industry. The online retail sector will create almost 3 million high-skilled jobs in the next few years. It also pays out a greater portion of revenues to employees than physical retailers, in part because it hires more workers with tertiary education. This will help alleviate the 16.4% unemployment rate of university graduates, assuming the graduates have the relevant skillsets.

Based on case studies in the US and Japan, China's e-commerce and m-commerce sectors can improve their labor productivity through investing in more efficient systems. For example, most express delivery players in China have already started using semi-automated sorting centers in bigger cities. Online retail has also driven the development of adjacent industries, such as the $13 billion service provider sector (marketing and online advertising, payment systems, logistics, delivery, IT services).

With the rising popularity of mobile devices and and new innovations to mobile payment systems, China's m-commerce will continue to experience robust expansion and leapfrog physical retail. These will help China rebalance towards domestic consumption and the tertiary sector, creating major growth opportunities at home and abroad.

"China doesn't have to go out and build brick and mortar malls," says Roach. "Online malls are virtual, and their reach is greater."

David Yin is a senior at Yale University and former editor-in-chief of the magazine. Contact him at david.yin@yale.edu.